For businesses around the world, financial statements serve as critical tools for assessing the financial health and performance of companies. For the executive management, it allows them to make business decisions to steer profitability. For other stakeholders, from investors and suppliers all the way to regulators and customers, the financial statements are a way to guide their decisions when relating to the company.
To form this accounting picture, a few documents are usually required:
- statement of financial position
- statement of income and other comprehensive income
- statement of cash flows
- statement of changes in equity
Because of how important they are and their associated impact, it is sometimes required to vouch for its credibility with an audit. Audited financial statements provide an external stamp of approval on their accuracy and compliance. So why are there unaudited statements used in certain scenarios?
Why Are There Unaudited Financial Statements?
The truth is that auditing is a tedious process and requires extra cost. Auditing requires an independent review and verification process – one that needs to check for regulatory compliance with local guidelines, completeness in coverage and mathematical correctness. This is often performed by a certified external auditor and can be an extensive and long-drawn affair to ensure accuracy.
That said, unaudited financial statements also hold value, albeit with certain caveats. They are most often used as reports for internal use for management purposes and provide a snapshot of financial data for a specific reporting period. This can be dictated by the company’s management as preferred for their internal processes.
Typically, unaudited statements are issued on a quarterly basis or for specific reporting periods between annual audits. They are used by management to assess the company’s financial performance, make informed decisions, while providing stakeholders with up-to-date financial information. With their timeliness, unaudited statements are better at offering insights into recent developments and trends that may impact a company’s financial position, such as those regarding its liquidity, profitability, and cash flows.
While unaudited statements have not undergone external scrutiny by certified public accountants (CPAs) or auditing firms, they are usually reliable enough to serve the internal needs of the business and provide interim financial information to stakeholders. It is thus also important to gain understanding of unaudited financial statements as well as they can be used for other practical business functions such as:
- Supporting applications seeking loans or other banking facilities
- Tax submission
- Reports for Annual General Meetings
- Supporting grant applications
Does This Affect Filing?
Regardless of their state as being audited or unaudited, all organisations must file their accounting reports to the local authority – in this case the Accounting and Corporate Regulatory Authority (ACRA) of Singapore. All of these financial statements must be in compliance with the Singapore Financial Reporting Standards.
So How Does One Determine If Audited Or Unaudited Financial Statements Are Required?
Only select companies who have been approved and qualify for audit exemptions are legally permitted to file unaudited financial statements. As of 1 July, 2015, ACRA only allows those that are designated as a small company or small group, or a small company which is part of a small group to enjoy submission of unaudited financial statements.
Some of the criteria to achieve the “small company” category must include that it is a private company in the financial year in question and that it meets at least 2 out of the 3 quantitative criteria listed over the past two immediate, consecutive financial years:
- total annual revenue under or equal S$10 million
- total assets under or equal S$10 million
- total number of employees not exceeding 50.
For a small group and company as part of a small group, they mostly include the above criteria with minor adjustments.
Do note that this exemption can be revoked when these criteria no longer apply e.g. when revenue or staff number increases.
Why Is This Given To This Select Group?
Given the exacting process of an audit, Singapore authorities understand that smaller entities will find it difficult to provide fully audited statements. To encourage its reputation as a country welcoming of entrepreneurs and to support its existing high number of SMEs, the government has allowed them audit exemptions. This gives these businesses the opportunity to use simpler accounting and bookkeeping services to prepare unaudited financial statements.
Conclusion
Audited financial statements remain as the only credible reports when it comes to top-tier functions, especially when it is a large organisation where inaccuracies or conflicting reports are more likely to occur. They are deemed so because the independent party will apply the detailed methodology from International Standards on Auditing (ISA) to ensure reliability, accuracy and cohesion. It will also align the reporting to suit accounting frameworks, such as the International Financial Reporting Standards (IFRS) or Singapore Financial Reporting Standards (SFRS).
However, for more realistic operations, unaudited financial statements provide the necessary information for more routine assessments. They are useful and timely indicators that have their role in business functions and can also be supported with other sources of information, such as management reports, industry trends, and external benchmarks, to obtain a comprehensive understanding of a company’s financial position.
Consider your business needs and whether you’re looking for experienced auditors or just simple bookkeeping services, let the seasoned consultants at PLCO assist you with your accounting requirements.
